The Simplest Way to make the most of Volatility

Well, to start off, what does it mean? In short, it’s just rapid change and unpredictability. Australians are usually a fairly optimistic bunch (she’ll be right, mate), but when most people think of volatility and investment, it’s a different story. Most people would suggest, when it comes to markets, volatility means down. That’s not necessarily the case.

Now, lets talk for a minute about the recent uptick in volatility. Firstly, let’s put this into perspective.

In 2017 the S&P 500 Index (a broad measure of the US stock market) recorded eight days of a one per cent or greater move (either up or down), with no days seeing a move of two per cent or more for the entire year.

Since the start of 2018 (to 10 April) there have been 68 trading days in the US. Across this timeframe, the S&P 500 Index has recorded 28 days of a one per cent or greater move in either direction.

The largest daily move was more than four per cent, as well as one day of more than three per cent and six days of more than two per cent.

An increasing mix of factors has contributed to this noticeably higher level of volatility, including a divergence in price/value between classifications of stocks; industry trends; and macro-political influences.

What are we worried about?

The potential for rising interest rates;

The US Deficit;

Chinese Growth

That’s a start.

So, we can comfortably say that volatility is ‘likely’. Now, everyone would prefer (I imagine), a nice steady graph of their chosen investment market such as shares, property, bitcoin (just kidding) going steadily up and to the right. Like this.

But that’s not going to happen. In fact, over the last 12 months, the ASX 300 (the most commonly used proforma for the Australian Stock Market, has been like this.

That’s why there is a picture of a roller coaster in the heading.

But, and this is the good news, most Australians of working age are already making the most of this volatility without even knowing about it. Making regular contributions to investments (also known as Dollar Cost Averaging), helps smooth out these returns, and can even mean your investments make money when the price doesn’t rise. Huh?

The mathematics are a topic for another day (awww says everyone we love mathematics), but the good news is, if you have an employer (or are an employer) and are receiving regular super contributions, then volatility is probably your friend. There’s a few disclaimers like you don’t want too much volatility close to retirement, but if you are working, and say below 55, volatility may be the wind in your sails (Terry always likes a boating reference).

I will go into the specifics of how dollar cost averaging can work next week, but until then if you have any questions, please give us a shout.